Executives could move sourcing, production to compensate for higher duties

U.K.-based Jaguar Land Rover Automotive PLC could lose more than 100% of its S&P-adjusted Ebitda in 2019, should the U.S. raise import tariffs, according to a report from S&P Global Ratings.
Photo:
Bryan Thomas/Getty Images

A potential increase in U.S. tariffs on cars imported from Europe would dent the profitability of the region’s major auto makers and could force executives to shift where certain car models are produced, a report by S&P Global Ratings said Tuesday.

The Trump administration last month received a Commerce Department report on whether imported vehicles and parts could pose a national security risk, a key justification for imposing tariffs under U.S. trade laws. Mr. Trump has until mid-May to consider tariffs or other measures.

The credit ratings firm predicts aggregated adjusted earnings before interest, taxes, depreciation and amortization would fall by 15% for six major European auto manufacturers. Credit ratings also could suffer following a rise in import tariffs, the report said.

“This hike in duties would severely challenge profitability and may increase the urgency for further consolidation,” S&P credit analyst Vittoria Ferraris said.

Most car makers won’t be able to increase significantly their sale prices to offset the tariff impact because of the competitive nature of the U.S. car industry, Ms. Ferraris said. Instead, they could be forced to alter their production and sourcing patterns, she said. It could take six to 24 months to reorganize supply chains and move auto production lines closer to the U.S. market, she said.

U.K.-based Jaguar Land Rover Automotive PLC could be hardest hit by new U.S. tariffs, as it sources little of its supplies from within the area covered by the North American Free Trade Agreement, S&P said. The company, which is suffering from lagging sales in China and elsewhere, could lose more than 100% of its S&P-adjusted Ebitda in 2019, should the U.S. raise import tariffs.

S&P calculates adjusted Ebitda by including dividends from joint ventures and from company-accounted equity, and by leaving out other items such as leasing expenses.

Jaguar Land Rover’s credit rating also could take a hit from higher U.S. import tariffs. S&P downgraded the auto maker’s parent company
Tata Motors Ltd.
to BB- from BB in December, plunging the company deeper into junk-rated status, and could take further rating actions in the event of a no-deal Brexit, in which the U.K. leaves the EU without a withdrawal agreement.

A Jaguar Land Rover spokeswoman described S&P’s assessment as speculative. “We remain concerned about the impact of potential tariffs on our company, U.S. dealer partners and customers,” the spokeswoman said.

S&P forecasts
BMW AG
’s 2019 Ebitda could decline by 10% or 20% should the U.S. raise its import tariffs.

The company could transfer some production of its model X3 sport-utility vehicle to the U.S., Chief Executive
Harald Krüger
said in a recent earnings call.

“That gives us the flexibility in case there are tariffs,” said Mr. Krüger, adding that the company could also ramp up its sourcing in the U.S. to avoid the higher tariffs.

BMW and other premium car makers also might find room to pass on some of the additional costs to consumers, Ms. Ferraris said.

Representatives for BMW didn’t immediately respond to a request for comment.

S&P predicts
Volkswagen AG
’s Ebitda for this year could decline by less than 10% if the U.S. introduces a 25% tariff, S&P said. The company, which is continuing to grapple with the fallout of its diesel emission cheating scandal, is planning to introduce another sport-utility vehicle to the North American market, according to a March 13 earnings call.

That and other changes to its production lines could “heavily overcompensate that tariff effect,” said Arno Antlitz, head of controlling and accounting for the Volkswagen brand, on the call.

A Volkswagen spokesman said the company doesn’t have anything to add because the situation hasn’t changed since its most recent earnings call.

“If any additional tariffs were to be implemented, then it would be negative for the auto industry as a whole,” a Volvo spokesman said. “Volvo Cars would like to see the U.S., Europe and China lower their tariffs on cars or remove them.”

Making significant changes to sourcing and production in response to the tariffs isn’t be the best option for all car makers, said Philippe Houchois, an automotive industry analyst at Jefferies LLC.

“If you are already in the second half of a product cycle, selling at a slightly higher price and accepting lower sales might be less expensive than moving your production,” Mr. Houchois said.

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